Economy in U.S. expanded more than forecast in second quarter

Budget Cuts

Government spending fell at a 0.9% annualized rate, compared with a prior estimate of a 0.4% decline, as state and local outlays dropped.

Among other details, residential construction increased at a 12.9% annualized rate.

The rebound has spilled over into spending on remodeling. Atlanta-based Home Depot Inc., the largest U.S. home-improvement retailer, and smaller rival Lowe’s Cos., in Mooresville, North Carolina, each reported second-quarter profit that topped analysts’ estimates and raised their annual forecast.

Today’s report also showed price pressures remained contained. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, rose at a 0.8% annualized pace. It was the weakest performance since the fourth quarter of 2010.

Fiscal Tightening

The lingering effect of fiscal tightening is expected to wane this quarter and the next. The payroll tax had reverted to its 2010 rate of 6.2% in January after holding at 4.2% for two years, resulting in lower take-home pay. About $85 billion in automatic across-the-board federal spending cuts, known as sequestration, started taking effect in March.

Consumers continue to spend on big-ticket items. Car and light truck sales are on track for the best year since 2007, figures from Ward’s Automotive Group show. Combined purchases of new and existing homes are the highest since 2009, according to Bloomberg data.

Federal Reserve officials were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying later this year if the economy improves, minutes of their July meeting showed.

Economic growth is projected at a 2.5% annualized pace in the second half of the year, according to the median forecast in a Bloomberg survey of economists this month.

There are also signs of improvement in overseas markets such as China, which is stabilizing after a two-quarter slowdown. The world’s second-biggest economy reported that industrial-profit growth rebounded in July, and also posted higher-than-forecast industrial production in July, a rebound in trade, and a stronger reading for a manufacturing index.

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